A recent report discusses the difficulty in determining accurate property values in the areas impacted by Hurricane Katrina.

Mortgage hurdles spring up in wake of Katrina
 
One stumbling block for  mortgage issuers is the challenge of appraising property post-Katrina New Orleans. Because the pace of real estate activity has slowed in the months since the storm, comparable sales information can be difficult to come by. 
In New Orleans, one thing that isn’t big or easy is mortgage activity, which is at a fraction of its pre-Hurricane Katrina level because homeowners’ insurance policies and property appraisals — two key prerequisites to obtaining a mortgage — now are much more difficult to get.

In Orleans Parish, the Office of Notorial Archives has recorded 11,324 transactions — including sales, mortgages, leases and refinancing arrangements — since reopening Oct. 10, according to archivist Stephen Bruno. In the same period a year earlier, from October 2004 to March 2005, there were 36,134 transactions.

In St. Bernard Parish, where the bulk of the parish's housing stock was damaged by flooding, mortgage activity is at about one-fourth of its pre-Katrina level, said Lena Torres, clerk of court. And property sales are at about one-tenth of their pre-Katrina level, according to the New Orleans Times-Picayune.

One key hurdle standing in the way of mortgage issuers is the challenge of appraising property post-Katrina, according to a report by the Times-Picayune.

Because the pace of real estate activity has slowed in the months since Katrina, comparable sales information can be difficult to come by.

“It’s … harder to find comparable sales,” said Paul Peters, president of Hibernia Mortgage. “It is harder to determine value in some locales.”

Peters told the Times-Picayune his bank is trying to make sure its appraisals reflect the value after Katrina, not before.

In addition to a current appraisal, Peters said Hibernia has set other criteria for issuing mortgages. The property must be a readily marketable, fully functional home in a thriving neighborhood. The property, for example, must be ready for immediate occupancy. And it must have certain community amenities such as police, fire, water, gas, sewer service and street lights.

Executives at Standard Mortgage Corp. are developing a new appraisal method that takes into account post-Katrina realities.

Jo Ann Crow, senior vice president of production and origination, told the newspaper that new method involves looking at comparable sales in the neighborhood before Katrina and discounting the property according to its current condition.

“We look at what is being sold gutted and the cost to do the renovation,” Crow said.

According to the Times-Picayune, the new appraisal process meant that one property in St. Bernard Parish that would have sold for $270,000 before the storm was recently appraised at $180,000. Crow said the new figure included $100,000 for the cost of the gutted house and $80,000 for renovations.

According to Crow, appraisers must defend their numbers more thoroughly to explain how they arrived at their conclusions.

Adjusting standards

The more careful appraisals and numeric justification are required if the bank wants to sell its mortgages to a government agency. Banks usually sell the bulk of their mortgages to the GSEs ­— Fannie Mae, Freddie Mac and Ginnie Mae.

But since the hurricane, some financial institutions have found selling their mortgages a tough row to hoe. The reason is that the GSEs will buy only mortgages that meet certain requirements establishing that the mortgage is secure.

The federal agencies are working with lenders to come up with standards that make it possible for lenders to be more flexible.

Fannie Mae, for example, has liberalized the standards banks must adhere to in appraising properties. Banks now are allowed to use measures such as rebuilding activity to gauge a market’s health when information on comparable sales is not available.

Fannie Mae also is working on new guidelines for loans to rebuild property and has relaxed some of its credit standards, letting consumers use a credit score determined before the storm and making it possible for consumers to exclude existing mortgages from their debt load.

Similarly, Freddie Mac is allowing temporary income to be used in qualifying a borrower, alternative documentation if the borrower does not have income and employment records and credit reports that do not contain derogatory information that may have been added after the storm.

The GSEs note that they are trying to solve the problems that have slowed their purchase of mortgages from the most severely impacted areas of New Orleans.

Generally, mortgages are being made easily in parishes that suffered relatively little flooding, including in Jefferson, St. Tammany, East Baton Rouge and St. John the Baptist.

Tim Carpenter, state director for Fannie Mae, said things are different in New Orleans. He noted there “is not a market (for Fannie Mae to buy mortgages) there yet.”

The tough sell to the GSEs is a bigger problem for Gulf Coast Bank & Trust Co. than the shortage of homeowners policies, said Guy Williams, president of the bank.

At a recent meeting of regulators, Williams urged investors to pool their money and buy loans to help the area recover.

Alden McDonald, president of Liberty Bank, which has a large real estate portfolio in heavily flooded eastern New Orleans, made the same plea.

Fannie Mae wants post-Katrina appraisals, Williams said, but there has not been enough time to develop comparables. “They have a responsibility to step forward and get outside the box.”

Another problem, according to John Casbon, president of First American Title Co., trouble getting a homeowners insurance policy has become a steep obstacle for many potential home buyers.

Insurance companies re-evaluate their coverage to ensure they’ve got enough money flowing in to handle potential losses. Sometimes, they stop issuing new policies in an attempt to minimize their risk. And that is happening in Louisiana.